Mumbai: Kotak Mahindra Asset Management Co. Ltd (KMAMC) on Wednesday launched an international mutual fund (MF) for domestic investors in an attempt to tap a small, but growing market for such products. It is the fifth firm to launch such a product. The company’s fund, Kotak Global Emerging Market Fund, a three-year closed-ended scheme, will invest in international fund manager T Rowe Price’s Global Emerging Markets Equity Fund.
T Rowe Price has been investing in Indian markets as a foreign institutional investor for a decade. The emerging market fund has $600 million (Rs2,412 crore) in assets. It has invested 51% across Asian emerging markets, including 10.2% in India, and the rest in Latin America, West Asia, Africa and Europe. KMAMC managed assets worth Rs17,254 crore as on 30 June.
While Kotak’s new offering allows exposure to stocks in emerging markets, Sundaram BNP Paribas’ open-ended Global Advantage Fund, launched last week, allows exposure to commodities and real-estate assets also, besides equities, primarily in Asia, Europe and Latin America. The Sundaram fund will be managed like a fund of fund. In other words, it will invest in those funds that in turn invest in these asset classes. For instance, it could invest in BlackRock Merrill Lynch Emerging Europe Fund, Fidelity Korea Fund, Easy ETF Global Commodity Index and iShares EPRA Global Property, a global real estate investment trust.
Principal Asset Management was the first company to offer a full-fledged global fund. Its fund, launched in March 2004, invests in PGIF Emerging Markets Equity Fund. With assets of more than Rs500 crore, this fund has outperformed the Indian markets over a three-month period, with a return of 16% as compared to the Sensex and Nifty’s gain of around 11% as on 23 July.
To be eligible for exemption from capital gains tax and dividend distribution tax in India, equity funds need to invest a minimum of 65% of their assets in Indian listed stocks. International funds, such as those from Sundaram and Kotak, will be fully invested in international stocks. They will be treated as non-equity schemes and will be subject to short-term and long-term capital gains tax.
Short-term capital gains is treated as a part of the income and taxed according to the applicable slab, while long-term capital gains is taxed at 10%.
The international funds could also be subject to dividend distribution tax at the rate of 25%. Taking into account the surcharge on this tax and education cess, the effective dividend distribution tax works out to 28.32%.
That is one of the reasons why Fidelity Fund Management’s International Fund, launched in April, has an option of investing up to 35% in foreign stocks and the balance in Indian ones. Templeton India’s Equity Income Fund has an option of investing up to 35% in dividend-yielding stocks in other markets. Since these funds meet the definition of an equity fund according to local tax laws, they are not subject to dividend distribution and capital gains tax.
With the Reserve Bank of India placing restrictions on the kind of investments that can be made by Indian investors under a $100,000 remittance scheme, these international funds provide a window for investing abroad. Considering the fund industry’s track record of launching me-too products, there could be a line-up of more such international funds waiting to be launched. “Indeed investors may face a problem of plenty if too many such funds are launched. But as of now, Indian investors do not have any exposure to international markets in their portfolio. And there is little awareness about such opportunities. So we will need to educate them about the benefits of a diversifying across boundaries,” said Sandeep Das, business head (investments and bancassurance) at Standard Chartered Bank.